Gold Outlook

Is Gold At A Bottom As U.S. Economy Grows 4.1%?

(Kitco News) - While gold continues to hover at the bottom end of its range near its recent 12-month lows, optimism is growing in the marketplace as there are signs that the selling pressure is starting to wane.

While gold is preparing to see its third week of consecutive losses, the market was not hit with a new wave of selling after U.S. economic data showed the economy expanding by 4.1% in the second quarter. August gold futures last traded at $1,224.30 an ounce, down 1.4% from the previous Friday.

Ole Hansen, head of commodity strategy at Saxo Bank, said that despite the strong gross domestic product (GDP) data, gold has managed to hold above critical support levels. He added that gold could see a bit of a boost going forward as investors readjust their expectations on economic growth going forward.

“There is some belief among investors that this could be a good as it gets for the rest of the year,” he said. “Many things have happened since the end of the second quarter.”

Bill Baruch, president of Blue Line Futures, said that although the GDP report showed robust growth, the market was already expecting a substantial number. He added that there are fewer factors in place that will continue to drive the U.S. dollar high and gold prices lower in the medium term.

Looking at gold, he said that the market is pretty much as bearish as it can get.

“Shorts are already positioned in gold and we think we are building a floor. We will continue to see limited downside risk for gold going forward,” Baruch said.

Maxwell Gold, director of investment strategy at ETF Securities By Aberdeen Standard Investments said also said that economic growth could struggle to maintain its current momentum. He added the current gold price is an attractive entry point for investors to build a strategic position.

“Gold is down but certainly not out,” he said. “The growth numbers we are seeing are common in late-stage economic cycles and I think gold will look attractive as investors worry about continued economic growth going forward.”

Gold Remains A Currency Trade; Watch The Yuan, USD

While optimism is building within the precious metals space as trade war fears weigh on future economic growth, the most significant unknown factor for investors remains currency markets, in particular, the Chinese yuan.

Recently, gold has seen a relatively high correlation to the yuan as the Chinese government has weakened its currency to combat U.S. trade policies. Many analysts have noted that further weakness in the Chinese currency will continue to weigh on gold; however, some are noting that even the yuan has its limits.

“There is potential for further yuan weakness, but even this trend is becoming exhausted,” he said.

However, Colin Cieszynski, chief market strategist at SIA Wealth Management said that he could see further weakness in the yuan as the government remains belligerent towards President Donald Trump and his administration.

Some economists have said that China has gotten the most out of a weaker currency and the government could start to look at other measures like increasing infrastructure spending to further boost economic growth and offset trade weakness. Commodity analysts have said this scenario would help boost demand for raw commodities, which in turn would push precious metals prices higher.

The other major currency to watch is, of course, the U.S. dollar. Christopher Vecchio, senior currency strategist at DailyFX.com, said that technically, he sees the potential for further strength in the U.S. dollar in the near-term, which could eventually push gold back to its recent 12-month lows.

“Without gold clearing above $1,230 an ounce, you don’t want to be long gold. I would personally not be long gold until we get some confirmation that this downtrend is over,” he said.

Fed Meeting A Non-Event

Along with a depreciating yuan, many economists note that U.S. Federal Reserve hawkish monetary policy continues to support the U.S. dollar.

However, Baruch said that he is not convinced that this will continue to support the U.S. dollar as the central bank is as hawkish as it can be.

Vecchio said that he is not expecting to see any significant surprise at next week’s Fed meeting as market expectations are pretty much as high as they can be. The CME Fedwatch Tool is pricing in an 89% of a rate hike in September with a 68% chance of a fourth rate hike this year in December.

For next week markets only see a 2.5% chance that the central bank raises interest rates.

Gold Investors Need To Be Patient

Although optimism is growing in the marketplace, many analysts are neutral on gold in the near-term.

Cieszynski said that he wants to be bullish, but he needs to see prices push above near-term resistance at $1,236. That is also the level Vecchio is watching to signal an end to the current downtrend.

Vecchio added that until he gets that confirmation, the gold market looks “fairly ugly.”

Hansen said that he is not in a rush to establish a long-term position in gold. He added that if investors are nimble enough, they can play the trading range between $1,210 an ounce and $1,250.

“This is not the time of the year to make big decisions on direction,” Hansen said. “Traders are more concerned with getting their kids to the beach.”

Baruch said that he likes to play gold through the options markets and is initiating a bull call spread. He said that he likes buying December $1,250 calls while selling $1,300 December calls.

“I think in three months we will see much higher gold prices,” he said.

The Final Say

While the Federal Reserve’s monetary policy meeting is the big economic event next week, there will be enough economic data released to keep traders busy.

The week starts with pending home sales, which is gaining more attention among market participants as the U.S. housing sector shows signs of weakness.

Markets will also receive consumer confidence data, personal income and spending data and manufacturing data.

Finally, next week ends with a bang with the release of July employment data.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.